GM Outsourcing Overhaul, 1 Year Later

By Doug Bartholomew |
Posted 01-07-2007

After 10 years of trying to captain a ship with the wheel lashed to a dead-on course, Ralph Szygenda finally got the chance to chart the course himself. His first day at sea, he cut the wheel hard to starboard. He hasn't looked back since.

As group vice president and CIO at General Motors, Szygenda had spent a decade with basically a single outsourced information-technology service providerEDS, which GM spun off in 1996. At that time, GM signed on with EDS to continue to provide the bulk of its information-technology needs under a 10-year pact, worth a total of $30.6 billion, that started out at about $4 billion a year and shrank to less than $2 billion by 2005.

Although that contract expired in mid-2006, GM jumped the gun last February by holding the largest commercial contract bidding process that the I.T. industry had ever seen. In the first phase of a $15-billion, five-year outsourcing mega-deal, GM tapped a half-dozen technology partners to share in an initial $7.5 billion pie. The balance will be awarded over the coming five years as GM's businesses require new software, computers, and systems development and deployment.

Almost a year later, with the dust having settled on the deal, GM has completed the reassignment phase, transferring work among the players while avoiding any systems failures during the transition that could have disrupted its business. Even so, it's still too early for GM to point to solid gains in I.T. efficiencies, business innovation or extended global reach. "We're still a year or two from seeing any kind of results," observes Kevin Reale, research director for automotive at AMR Research in Boston.

One thing is for certain, though: The new multi-vendor outsourcing deal is already helping to further slim GM's global I.T. costs. The automaker's new service providers will further consolidate its computing resources and data centers, Szygenda says. "GM is saving a lot of money," he says. "We expect much lower costs over the five-year period."

On Szygenda's watch from 1996 to 2006, GM's information-technology budget was cut from more than $4 billion to less than $3 billion by 2005. A spokesperson commented that Szygenda is looking for a similar-size reduction from the new deal. And, given GM's gargantuan 2005 loss of $10.6 billion, that may be far too conservative a cost-reduction target for comfort. "They really need to cut I.T. costs by half," says Martin Piszczalski, an analyst specializing in the automotive industry at Sextant Research, a consulting firm in Ann Arbor, Mich. "A lot of the cost cutting is going to be shifted onto the shoulders of these service providers."

Not surprisingly, the biggest chunk of the outsourcing piea five-year deal worth $3.8 billionwent to GM's longtime technology partner, EDS. Still, on an annual basis it represented a reduction from EDS' previous near-monopoly, from $1.8 billion in 2005 to about $1.4 billion in 2007. As Szygenda puts it, "I never want an I.T. supplier to hold me hostage."

To be sure, the flexibility to push costs down is what GM needs the mostand fast, to reverse the trend of unprofitability. After last year's stunning $10.6 billion loss, it's no wonder GM is eager to crack open that big I.T. spending acorn and begin doling it out piecemeal on a more competitive footing.

Szygenda insists that reducing I.T. costs wasn't the chief reason for carving up the pie among a host of bidders: "We are putting all that savings back into new global systems development, and over the five-year period we expect to have new functionality at much lower cost."